Why Price Increases Are
Brewing for Craft Beers

That six pack of high-brow beer is about to come at a higher price, thanks to the sharpest surge in decades in the cost of the hops and barley that give each brew its distinctive taste.

Consumers could pay 50 cents to $1 per six pack more in the coming months for many small-batch "craft beers," as brewers pass on rising hops and barley costs from an unpalatable brew of poor harvests, the weak dollar and farmers' shift to more profitable crops. Other makers of craft beers, the fastest-growing segment of the U.S. brewing industry, say they may eat the higher ingredient costs, which will pare their profits.

"The hops are to Samuel Adams what grapes are to wine," says Jim Koch, founder of Boston Beer Co.SAM-1.32%, maker of Samuel Adams Boston Lager, one of America's fastest-growing beers. The company has raised its prices just over 3% this year to help offset the hops and barley costs. Mr. Koch says that for next year, the company is "probably looking at the same or maybe more."

ENLARGE

Jim Koch, right, with Bavarian hops farmer Stephan Stanglmair.

"The cost increases have been the largest we've ever faced, both in barley and in hops," says Mr. Koch, who founded the company in 1984. The company only buys hops that are grown on several thousand acres in Bavaria, and the crop has been smaller in the past two years, making them more expensive, Mr. Koch says.

The cost pressures could slow the expansion of American craft brewers, which account for about 5% of U.S. beer revenue, and even put some smaller ones out of business. Craft-beer makers also are battling other cost increases, including higher prices for glass, cardboard, gasoline and the stainless steel used to make beer kegs. "People are very concerned," says Kim Jordan, co-founder of Colorado's New Belgium Brewing Co., which makes Fat Tire Amber Ale, a top-selling craft beer. "It significantly affects profitability."

Big American brewers like Anheuser-Busch Cos. and SABMillerSBMRY-1.29% PLC's Miller Brewing Co. also face cost increases, but the impact isn't nearly as great for them. They use much less hops and barley in most of their beers, which is why they are lighter in taste and calories. A barrel of craft brew Sierra Nevada Pale Ale, for example, has about twice the malt and as many as five times the hops of a mass-market brew, like Budweiser or Miller High Life.

Large beer makers are also better able to secure long-term contracts to mitigate the impact of rising ingredient costs. Most spirits makers, such as DiageoDEO-0.79% PLC and Fortune Brands Inc., also face a relatively limited impact from global increases in the cost of grains such as corn.

The craft-beer segment has been among the few bright spots in the slow-growing U.S. beer industry. The number of barrels of craft beers sold rose 11% in the first half of this year against year-earlier levels, according to the Brewers Association, a craft-beer trade group in Boulder, Colo. Meanwhile, the Beer Institute, a Washington-based industry group, projects total U.S. beer sales, by barrel, will rise 1.5% this year. The boom in craft beers reflects heightened awareness of their brands and a willingness by American beer drinkers to pay an extra $2 or $3 per six pack to get a premium product.

Craft beer makers have faced escalating costs over the past year. Prices for malting barley, which accounts for a beer's color and sweetness, have jumped as farmers increasingly shifted to planting corn, which has been bringing higher prices because of high demand from makers of biofuels, like ethanol. The weak dollar also has made it more expensive for U.S. brewers to buy commodities from Europe.

The news worsened for craft brewers significantly in recent weeks. Firms that turn barley into brewing malt informed craft brewers of price increases ranging from 40% to 80%, and hops suppliers announced increases ranging from 20% to 100%, depending on the variety of hops.

The price of hops -- which give beers their bitterness and aroma -- has risen because of shortages across the globe, due in part to poor crops in Europe. Some European brewers are competing with American brewers for hops grown in the Pacific Northwest.

ENLARGE

For years, hops were cheap due to a glut. That prompted growers over the past decade to replace hops with other crops, such as apples. Now, the amount of hops acres world-wide is about half the total of 12 years ago, says Ralph Olson, a hops dealer with Hopunion CBS LLC in Yakima, Wash. That's caused some hops varieties to quadruple in price over the past year, he says.

To cope with higher malt and hops prices, smaller brewers are trying to secure longer-term contracts for the ingredients. And, in some cases, they're tweaking their recipes.

At Bell's Brewery Inc. in Comstock, Mich., founder Larry Bell says he is substituting other varieties of hops into the brewer's Bell's Oberon Ale and Bell's Lager because he could only secure 60% of a Czech Saaz hops that he normally uses in the beer.

Mr. Bell says employees who test beers at his company haven't been able to detect a change with the new hops and that he won't make any changes that will compromise quality. Starting next year, he anticipates he will raise the price he charges beer wholesalers by 50 cents to 60 cents per case. Customers may see an even higher price increase because retailers typically mark up beer even further.

"I am concerned that there could be some small players out there that will fail because of this," says Mr. Bell, whose brewery sold its first beer in 1985.

Boston Beer has inked long-term contracts for some of its ingredient needs. But many smaller brewers, such as Allagash Brewing Co. in Portland, Maine, buy hops and malt on the open market, exposing them to huge price swings. Rob Tod, president of Allagash, says the company expects to absorb some of the recent cost increases. But it will likely impose some price increases, resulting in a four-pack of its Allagash White costing about $9 at retailers in the Northeast, up about 50 cents. "We're getting hit on all sides," Mr. Tod says.

Ken Grossman, the founder of Sierra Nevada Brewing Co. in Chico, Calif., says the brewer plans some price increases, but it's better positioned than others because a price spike for hops in the early 1980s prompted him to sign long-term contracts. "I've gotten calls of panic from other brewers," he says.

Dogfish Head Craft Brewery Inc. in Milton, Del., is coping by trying to make its operations more efficient, locking in commodity contracts as early as possible and weighing a price increase, says brewmaster Andy Tveekrem, whose company is known for "hoppy" beers like 60 Minute IPA, or India pale ale.

"I think there's going to be some brewers out there," Mr. Tveekrem says, "if they haven't looked that far ahead, that actually might run out of malt or hops, which would be a catastrophe."

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